September 16, 2021

Climate change and retirement funds in South Africa

By Dirk Oosthuizen, Head of Research and Principal Benefit Consultant

South African retirement funds currently operate in a difficult economic environment with low economic growth where a major contributing factor to this anaemic growth is the power shortage.

The country still has an abundant supply of coal and almost 80% of electricity in South Africa is still generated from coal. Furthermore, the country has almost no natural oil reserves and would have been forced to import all oil, had it not been for Sasol’s use of advanced technology to supply oil from coal. The rest of the world, especially Europe, is on an accelerated path to reduce carbon emissions given the scientific evidence and experience of climate change. This is an outcome of the Paris Agreement that was entered into by 196 parties including South Africa.

The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 parties at COP 21 in Paris, on 12 December 2015, and came into force on 4 November 2016. Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels. To achieve this long-term temperature goal, countries aim to reach global peaking of greenhouse gas emissions as soon as possible to achieve a climate-neutral world by mid-century.

The South African government has identified investment in infrastructure as a key factor to support economic growth in South Africa – and indeed on the African continent – and is trying to facilitate retirement funds to participate in funding infrastructure. These infrastructure needs are not confined to electricity but also include needs such as water and housing.

What can Boards of Trustees do to provide policy direction to investment advisers (managers) in this respect?

In the past, Simeka has required asset managers to develop a strong responsible investment policy and disclosure in respect of:

  • The leadership of investees;
  • Their capital structure; and
  • Remuneration

The aspects above reflect the typical rights that equity holders in investees retain and can vote on at these meetings. Simeka encourages active engagement with investee companies by asset managers. This engagement can take various forms but at the minimum should include voting at AGMs of investee companies. Even international passive investors such as BlackRock have demonstrated how important this is.

Voting of resolutions at the AGMs of investee companies reflects the typical rights that equity holders in investees retain and can vote on at these meetings. As retirement funds are not in a position to and should not manage their investees, it is expected from directors of investee companies, amongst all their other duties, to consider and provide leadership and guidance within the investee companies on matters such as climate change. These aspects can broadly be described as the stewardship responsibilities of a fund. It is encouraging to see how many of the leading asset managers have started to publish reports on their activities in this regard, and the level of activity at AGMs of investees.

Earlier this year, the United Nations provided guidance to policymakers (Boards of Trustees) by publishing a toolkit for sustainable investment. This toolkit provides for:

  • Encouragement of disclosure in line with the Task Force for Climate Related Disclosure (TCFD) by investees
  • Taxonomies of sustainable finance activities (to enable speaking the same language through appropriate definitions)
  • Encouragement of a just transition to a low carbon economy.

This framework is an important milestone, especially in a South African context, as we would have to plot a path from a carbon-intensive economy to a low carbon economy. Infrastructure investment requires long-term commitments and may have a high long-term impact. Given the resources SA has, the electricity shortage and requirements for a just transition, it is difficult to decide whether to directly or indirectly finance/commit to infrastructure with high carbon emissions. Funds will have to carefully consider capital allocation and disclosure in the future. We do not believe exclusion of carbon assets in South Africa is the appropriate approach at this moment in time, but we should rather plot a path of disclosure, careful capital allocation, engagement and election/appointment of strong leadership at investees. This path will develop over time.

These actions cannot be taken in isolation, as retirement funds – through their asset managers (advisers) – are typically minority investors in any investee company. Therefore, some collaboration between retirement funds, asset managers, banks and regulators is required to develop this path. Government will have to provide appropriate leadership through regulation, policy-setting, the national development goals – and deregulation – and also in their capacity as the owner of many infrastructure assets in South Africa.

We would encourage Boards of Trustees to consider the toolkit of the UN, which also developed online training initiatives for trustees, and its recommendations for incorporation into investment policy statements.